Markets are suddenly pricing in higher interest rates while the cracks underneath the economy keep spreading. The immediate trigger has been oil. A spike in crude fed straight into the inflation numbers, both PCE and CPI moved up, and that pulled everyone's attention toward short-term price pressure. Warsh has been talking hawkish, positioning himself as a modern Paul Volcker. You can watch the shift in the two-year treasury, which sits around 4.15 while fed funds is near 3.5. That gap means the market has flipped from expecting a rate cut to expecting a rate hike within the next couple of quarters. The timing on the first hike has already been pulled forward from December to September, driven almost entirely by that oil-to-CPI transmission. The Fed is stuck with its usual balancing act between an unemployment rate pegged around 4.3 for quite some time and an inflation figure that refuses to behave.
My read is that the trends are moving in the wrong direction, and part of the reason is that the Middle East became a shiny object. It captured all the attention and forced a focus on short-term inflation. Once that distraction fades, the market goes back to what it was worried about before, and that was private credit.
Private credit and the confidence problem
Private credit dropped out of the headlines for a month or more, and its risks quietly got worse the entire time. BlackRock recently announced yet another fund where it is halting redemptions. A lot of people wave this away as a nothing burger, pointing out that private credit is only about 3 trillion dollars against a mortgage-backed securities market that was roughly 60 trillion in 2008. That comparison misunderstands how the system actually works.
The monetary system runs on confidence. It requires dollars circulating globally, and that circulation is priced off risk, specifically counterparty risk and perceived counterparty risk. When an event pushes perceived counterparty risk sharply higher, the dollar size of the asset barely matters. A 3 trillion problem and a 60 trillion problem produce the same net result: the circulation of money and credit slows down. That is the mechanism that hurts, and it does not care about the headline number.
Who actually moves the money
The banking system is the engine that circulates money and credit, the oil in the car engine. Put yourself in the position of a bank that has an inside look at what is really happening inside the private-credit black box. That institution can separate reality from the marketing spin broadcast on CNBC by people like Larry Fink. If the bank believes risk keeps climbing while the reward is not there, its rational move is to refuse to lend into the real economy and instead park money in treasuries and wait to see how things play out. That refusal starves the system of exactly the circulation it needs, and it makes everything worse. Private credit funds already face a liquidity problem, and by definition, if money is not circulating, liquidity is being reduced.
As banks tighten lending standards, the borrowers who depend on those loans get fewer of them or none at all. Growth slows, fewer people can afford assets, and asset prices get pulled down further. It becomes a self-reinforcing cycle, and then someone finally has to do price discovery on the assets hiding inside the black box. That description is essentially 2008, because it is a credit cycle, and credit cycles play out the same way every time.
I do not know the magnitude and I do not know the timing. I only know that cycles are going to cycle. Warren Buffett described it as the tide going in and out. The tide has been in for a very long time. There is an argument it has gone out a little, but not nearly far enough to reveal who has been swimming naked. The longer the tide stays in, the more people swim naked, because there is an incentive to take the risk when the apparent downside is nothing. The trouble starts when the cycle reverses, and in my view that reversal began around six months ago. Blue Owl came out first, treated as no big deal and swept under the rug. Then Blackstone. Then BlackRock. Then a string of other funds, each one worse than the last. We are not yet at the point where everything has completely seized up, but we may be getting closer.
Speculative assets as the early warning
SpaceX is a useful signal here, and it ties back to the same theme of dollar circulation. There were two ways it could go. It could rocket higher and hold in the 220s, 230s, or 250s. Instead it rocketed and then came back down toward roughly 150, very near and possibly below the IPO price. That tells you the appetite for risk, and the amount of capital available to chase speculative assets, may be shrinking. You see the same signal when Anthropic and OpenAI call a timeout on going public and talk about waiting until 2027 or later. Delayed IPOs are themselves evidence that liquidity is drying up. If we are only in inning five or six of this credit cycle, and I think the evidence points that way, then you have to assume liquidity keeps decreasing before it starts to recover.
Could SpaceX turn out to have top-ticked the speculative era? I would put the odds above 50 percent, though I would not be confident enough to claim 75. It really comes down to the labor market, because the labor market drives the passive bid, a point Mike Green makes constantly. The passive bid is correlated to the unemployment rate, and as long as that bid is in place, it is very hard for the S&P 500 to fall. It works like Michael Saylor buying Bitcoin every single week, a relentless mechanical purchase regardless of price. If the credit cycle deteriorates far enough to lift unemployment, the passive bid flips into a passive sell. At that point the market almost certainly top-ticks, because the flow that was a tailwind becomes a headwind. Passive has been a tailwind for something like 25 years, two decades at minimum. I see no reason it could not be a headwind for the next 20 years, especially once you factor in demographics.
The demographic reversal
The baby boomer generation holds around 90 trillion in net worth, and at this point they are almost all retired. The personal savings rate has been falling and is running near lows, though not literally a record, since it has gone negative before. The conventional reaction is that a collapsing savings rate signals household distress. That is not necessarily true. Retired boomers are no longer earning, so of course they are not saving. They are sitting on that 90 trillion and will spend a chunk of it, which acts as a stimulant to the economy.
The catch is the distribution. That 90 trillion is wildly uneven, concentrated in a few very rich households, while the median boomer holds less than a quarter million in retirement savings. What matters for markets is that these people are no longer working, no longer putting fresh money into the market. Their contribution to the passive bid is ending, and to fund their spending they will be selling assets. That is a powerful demographic decelerant to the passive bid, one that should weigh on it more and more regardless of what the broader economy does. Mike Green agrees, and while he cannot pinpoint the tipping point, his sense is that we are not super far from it.
When paper wealth stops being wealth
Here is the piece that ties it together. Assume the S&P 500 sits where it is largely because of net passive inflows. If the demographic shift converts those inflows into outflows, then the 90 trillion on household balance sheets is no longer 90 trillion. It is 90 trillion on paper, a stack of unrealized gains.
Take a stock trading at 100 with no real bid until 50. The actual discretionary money will not touch it at 90 or 80, and it starts buying only at 50. All at once your 90 trillion in purchasing power becomes 45 trillion. Now picture a boomer, 85 years old, who has just watched half a lifetime of savings vaporize. That person does not sit still. They rush to sell the rest, which drives prices down further and deepens the spiral.
The rest of the world sells too
The same forced-selling logic applies abroad, and it compounds the domestic problem. Japan is already in a difficult position, and it holds an enormous quantity of US-based assets. If Japan and other export-heavy, net-importing countries keep struggling for the exchange-rate reasons already in play, they have to sell dollar assets to obtain the dollars they need. That could mean treasuries, gold, private credit, or commercial real estate funds. A great deal of reach-for-yield money went into the carry trade, and as that carry trade unwinds, those holders are pushed to sell dollar assets, which presses down on US asset prices.
So you end up with two large selling mechanisms operating at once: the domestic passive machine going into reverse, and the rest of the world deciding it needs to pull its capital out. Japan is arguably in the same boat as the boomers, needing the money for more pressing purposes and therefore forced to sell. I think that dynamic is one of the main reasons gold went down, though whether gold has found a bottom is an open question. The S&P 500 is heavily owned by foreigners and by huge pension funds holding the AI names and the Mag 7, and those holders could need the dollars far more than they need the shares. That pressure layers directly on top of the boomers retiring and reaching for their own dollars rather than their Mag 7 stock.
Treasuries are the one place I would not be especially worried. In the short term this kind of forced selling nudges the rate here and there, but over time treasury yields are predicated on growth and inflation expectations rather than deficits, counterintuitive as that sounds. I do not think growth and inflation are directly affected by the dynamics described here. If anything, in a scramble for safety you get a bid for treasuries. The deeper point stands: once the demographic shift turns passive inflows into passive outflows, the 90 trillion on paper stops being 90 trillion, because it was only ever unrealized gains held up by a continuous bid that will not last forever.
